Potential risks for global gas requirements this winter are likely being underestimated, with a "strong tug of war" for LNG supplies likely between the developed Asian markets and Europe if demand surges because of the cold weather, said Michael Stoppard, global gas strategy lead and special advisor with S&P Global Commodity Insights.
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"However, any resulting price spike will probably be not as extreme as last year as developing LNG markets have been crowded out," Stoppard said in an interview during the Energy Asia conference in Kuala Lumpur last week.
The Platts Asia JKM Japan/Korea DES spot prices hit a historic high of $84.762/MMBtu on March 7, 2022, according to S&P Global data, following Russia's invasion of Ukraine. Platts assessed JKM for August at $11.776/MMBtu on June 30.
The market is particularly fixated on European gas storage levels which are high, Stoppard said, adding "We will probably enter the winter period with storage levels close to full capacity."
"However, storage was not sized to meet winter demand on its own without Russian gas supply and the system has never been properly ever stress tested," Stoppard said, adding that a moderate European winter last year meant that the system was not tested under normal weather, let alone a severe one.
Two major factors have kept the market mostly balanced in the recent past -- reduction of European gas demand and the "coincidental weakness" of Japanese LNG imports because of the strong performance of nuclear power.
Reduced demand stays key to balancing LNG markets globally, Stoppard said.
"Demand at the current gas spot price levels may come back and therefore there is a need for gas prices to rise to keep demand low," Stoppard said, adding that this included both European gas demand, which has showed some signs of recovery lately, and Asian LNG demand.
On long-term prospects, Stoppard said that LNG growth was set to stay strong through to 2050. However, the growth to 2040 seems very well grounded and the growth beyond 2040 becomes very speculative and dependent upon the markets of Southeast Asia and South Asia, he said.
"What slightly concerns us about global gas demand is that it is going to be relatively unsuccessful at penetrating the power generation market," he said.
Many markets across Asia will see very strong growth in renewable power with coal playing a key role of back-up, leaving little room for gas. Gas, however, still has an important role to play in the industrial sector, Stoppard added.
There will be little increase in global LNG supplies in 2024, making it imperative to tread with caution over market shortages, Stoppard said.
"There is no solution to this problem [of restricted supplies] until new capacity from the US, Qatar and Canada begins in the second half of the decade," Stoppard said.
The supply response takes a minimum of about four years to come through and 2022-2027 is a period of "reshuffle," meaning a rearrangement of trade will occur with potentially higher LNG volumes into Europe at the expense of reduced LNG volumes to emerging developing markets in Asia.
Asia for its part is trying to mitigate risks associated with volatility through long-term LNG procurement contracts.
"In the last 18 months, we've seen a record level of long-term LNG contracting with a surge this year in June," Stoppard said.
Asian markets, notably China, have signed very long-term commitments with Qatar, but the main contracting has been from the US, he said.
A mixed portfolio of exposure and both oil-indexed pricing and Henry Hub pricing has proved very beneficial for buyers relative to dependence upon spot, Stoppard said.
Carbon-neutral LNG has taken a step back for the time being because the focus has turned to securing cargoes amid an energy crisis. Secondly, carbon-neutral LNG has also received poor publicity, partly because the governance around offsets is not sufficiently developed and credible, Stoppard said.
"I do believe the underlying idea of offsetting is essential and will come back. But there is a lot of work to be done," he said.
The upstream oil and gas industry has identified carbon capture and storage as a leading way to reduce Scope 1 and Scope 2 emissions. However, the real challenge and the opportunity for the gas industry will be the roll out of CCS to reduce Scope 3 emissions, which is where most of the emissions lie.
"That is still at a very nascent stage," Stoppard said.
The regulatory systems and incentives need to be developed further to promote CCS, Stoppard said.
The US' Inflation Reduction Act is the most famous example where effective tax credits are available to encourage CCS, with the move attracting enormous attention, particularly in the Texas area, Stoppard said.
Currently, nearly two-thirds of planned carbon capture and utilization storage, or CCUS, investments globally are in the US, Canada, and Europe.
Asia has huge potential for CCS, Stoppard said, adding that Malaysia along with other countries with a long history of oil and gas production in the region can play an important role in hastening decarbonization.
At the Energy Asia conference last week, Petronas inked an agreement with TotalEnergies and Mitsui to jointly pursue a CCS project in Malaysia. Separately, Petronas also launched the ASEAN Energy Sector Methane Leadership Program in partnership with ASEAN energy operators, governmental agencies, and international organizations. It also announced methane abatement flagship projects in collaboration with Japan Organization for Metals and Energy Security, or JOGMEC.